Warming up to Solar Energy

As the insurance and banking industries turn their attention to global warming, investments in solar energy take on growing appeal.

Like a hurricane hovering off the coast, the international insurance and banking industries may be poised to make their powerful presence felt in the global warming debate. And their arrival could give renewable energy a massive boost in the next few years.

Increasingly alarmed by threats to their financial security posed by an escalating number of weather-related catastrophes, major insurance companies — especially those in Europe and Asia — are starting to support a variety of measures that would slow the production of greenhouse gases worldwide. At the same time, some individuals in the financial sector are drawing attention to potential risks facing investments in fossil fuels.

As two of the richest, most powerful players in the world economy, the global insurance and banking industries are in a position to offer a rare counterweight to the oil and coal industries' influence in the climate change discussion. If bankers' and insurers' involvement in the issue continues to grow, policy changes as well as market impetus in favor of energy-efficient and renewable energy technologies are likely.

The insurance industry's interest in climate change stems from its sense of vulnerability. "The insurance business is the first in line to be affected by climate change ... it could bankrupt the industry," said Franklin Nutter, president of Washington-based Reinsurance Association of America, in a recent article in Worldwatch magazine. "[It] is the threat to people from natural events that drives much of the demand for insurance; yet, it is the same threat of future natural catastrophes that could jeopardize the industry's financial viability."

Since 1990, the international insurance industry has paid out $48 billion for claims from weather-related losses, up from just $14 billion for the entire decade of the 1980s. In the United States, 16 of the 25 largest insured catastrophes in the last decade involved a combination of wind and water. The biggest blow came in 1992 from Hurricane Andrew, which destroyed 85,000 Florida homes and inflicted damages estimated at $30 billion. (And it could have been worse: the director of the National Hurricane Center estimated that Andrew would have caused $100 billion in damages had it hit 30 kilometers further north.)

According to many experts around the world, including a U.N.-commissioned panel of 2,500 scientists, weather-related threats to U.S. coastal areas and countless other regions have been intensified by human activities, primarily the burning of carbon-based fuels. The six billion tons of carbon dioxide and other heat trapping greenhouse gases being pumped into the atmosphere every year are contributing to climate changes and may be partially responsible for an increase in frequency and severity of hurricanes, blizzards, heat waves, floods and droughts.

The response by the insurance industry to the various scientific studies and predictions has been mixed. The U.S. insurance industry has so far been much more reluctant than its European and Asian counterparts to put any blame for global climate change on man-made factors. In fact, the U.S. industry as a whole has only recently admitted to the possibility that a climate change is even taking place. Still, that admission is significant since insurance companies are in the business of mitigating risks on the basis of possibility, not certainty.

On the other hand, some of the biggest banks and insurance companies in Europe and Asia are already taking steps not only to mitigate losses in the short term but also to promote measures that could slow the rate of global warming in the long term.

"There's a significant body of scientific evidence indicating that last year's record insured loss from natural catastrophes was not a random occurrence," said the general manager of insurance giant Swiss Re in a 1995 internal report. "Failure to act would leave the industry and its policyholders vulnerable to truly disastrous consequences." Munich Re, another of the world's largest reinsurers, takes a similar stand, recently stating that "the threatened climate changes demand urgent and drastic measures."

In late March 1995, insurance executives from those and other companies gathered in Berlin to discuss the issue and potential responses. A few days later, many of those executives were lobbying negotiators who had gathered for the Berlin Climate Summit, a follow-up meeting to the Earth Summit of 1992. Representatives of Munich Re, Swiss Re and Lloyd's of London were among those calling for strong measures to reduce worldwide carbon emissions.

At the same time, realizing how long it could take for changes to be made in international policy, the insurance industry showed signs of taking things into its own hands. "It is probable that the insurance industry is going to have to take some initiatives by itself, or along with the banking industry," Lloyd's of London stated after the Berlin conference. To that effect, dozens of major insurance companies signed an accord with the U.N. in November 1995 in which they agreed to incorporate environmental considerations into their risk management and to address climate change.

American insurance companies were notably absent from the list of signatories as well as from the ongoing chorus of voices calling for immediate action to address the causes of global warming. While Nutter, of the Reinsurance Association of America, spoke at the Berlin conference and mentioned that the industry "should encourage the use of energy efficiency and renewable technology as part of efforts to preserve the future and our role in it," his presentation concentrated on measures that would mitigate losses rather than mitigate global warming.

Many of those measures were also discussed by executives of several major American insurance and reinsurance companies during a meeting with Vice President Al Gore in February 1995. In a follow-up letter to Gore in September, the group outlined steps it had taken in the previous months to increase its understanding of climate change and the economic consequences. The group also reiterated that the industry was committed to working with Gore and the business community on exploring the "synergies between initiatives associated with alternative and sustainable energy; improvements in construction design and techniques; and other areas where the insurers' perspective on hazard exposure, safety and loss mitigation will be constructive."

However, the industry maintained its position that global warming was not yet an established fact. "We are not scientists, and we are not in a position to evaluate computer models or interpret the effects of human behavior on climatic conditions," the executives said in their letter.

The different views on the issue were obvious during a July 1995 meeting in Washington hosted by SEIA and Greenpeace, which brought together representatives of the European and American insurance, reinsurance and banking industries, and others. "You could hear a pin drop when the representative from Uri Storabrand, one of Norway's largest insurance companies, described their investments in global warming mitigation and their surprise that the U.S. insurance sector is so passive," says Scott Sklar, SEIA executive director.

Despite Americans' hesitancy to acknowledge a causal relationship in the issue, it is likely that a more unified position will develop within the industry worldwide in the near future, according to Jeremy Leggett, an individual playing a key role in the debate.

An ocean geologist formerly employed by oil companies prospecting at sea, Leggett is now director of Greenpeace International's Solar Initiative. Instrumental in bringing global warming to the world's attention and in mobilizing the insurance and banking industries to become involved in the issue, Leggett also recently served as editor for the book, Climate Change and the Financial Sector. Subtitled, "The emerging threat. The solar solution," the book was brought to market in January 1996 by a publishing house owned by Rolf Gerling, a German billionaire who heads Gerling-Konzern Globale, one of the world's largest insurers. The book includes chapters authored by leading executives from the insurance and financial services industries who took part in conferences on global warming in Berlin and Washington, D.C. last year.

Leggett, currently a visiting fellow at Oxford University, says that his experience working with representatives of these industries has made him optimistic about their future involvement and influence. Even the U.S. industry's current stand doesn't discourage him. "The whole corporate environment in the U.S. has been much more disposed toward denial on this issue. There are just a lot more players with their heads in the sand in America than there are in Europe...But when the dam breaks, the U.S. companies will join the game very, very quickly."

Among the promising signs he sees in the U.S. is the recent formation of the "Global Climate Change-Insurance Industry Task Force" at Columbia University Graduate School of Business in New York, which will bring together members of the scientific, insurance, financial and environmental policy sectors. According to Joel Gordes, an environmental consultant who is coordinating the task force, establishing a dialogue is the first priority and an accomplishment in its own right. Gordes says the task force will focus on finding common ground through discussions on the significance of weather-related data as well as on possible responses that could meet insurers' "bottom line requirements." "Some of the solutions are going to be renewable energy sources," he says.

Perhaps more importantly, the worries of the insurance industry are starting to be shared by the financial services industry. "It's true that [the banking industry] is still some way behind the insurers [in involvement in this issue]," says Leggett. "But they're relatively new to the game. The reason they're concerned is very simple: The value of assets that are evidently under threat now from an enhanced greenhouse effect are so huge that enormous numbers of long-term debt and equity investments by the banking sector are at risk."

In Climate Change and the Financial Sector, the concern was expressed succinctly by Sven Hansen, vice president and head of environmental affairs for Union Bank of Switzerland. "[A]s bankers to those industries and companies which are really threatened by climate change, we have to be concerned and we must recognize that the financial markets will be affected by climate change....[S]ite contamination and lender liability are only the tip of the banker's 'environmental iceberg.' Climate change is, from my perspective, the mass lying underneath the water line and...[it] will probably surface soon."

As enormous as they are, investments that are directly threatened by weather related disasters are only part of the story. The scope of additional threats facing investors was outlined in a 1994 report entitled, "Long Term Financial Risks to the Carbon Fuel Industry from Climate Change." Commissioned by Greenpeace, the report was written by Mark Mansley, senior consultant with The Delphi Group in London. Formerly chief analyst and a director at Chase Investment Bank in London, Mansley is now researching the implications of sustainable development for the financial markets.

"With a stock market capitalization of over $400 billion, most institutional investors will have some holding in [the oil, gas and coal producing industries]," the report explains. "Most major banks will also have exposures to the industry, through commercial lending or bonds."

According to Mansley, it's likely that governments around the world will begin implementing policy changes to deal with global warming. Some of those government-developed initiatives, which are likely to be discussed at the International Climate Change Convention scheduled for 1998, could include the elimination of subsidies for carbon fuels, increased measures to promote energy efficiency, and "substantially increased support and encouragement for alternative energy sources, including funds for research and development, support for training and implementation, and the encouragement of suitable financing vehicles, including the active involvement of the development agencies."

Although institutional investors are not likely to support actions that would jeopardize their current investments, the possibility of government-sponsored policy changes and society's growing concerns about global warming might prompt the financial services industry to more carefully consider the risks of future investments in fossil fuels.

The report concludes that "investors of all kinds who hold positions in the carbon fuel industry are exposed to the risks of climate change...While climate change is unlikely to have a direct impact on the carbon fuel industry within the next five years, it could have radical impact as we enter the first decade of the next century. If the financial markets start to anticipate and discount these risks, then asset prices could be affected much more quickly.

"The companies which will benefit from climate change are those that are able to capitalize on increased energy efficiency, and those able to capitalize on the growth in alternative energy," writes Mansley. Peter Blackman, assistant director of the British Bankers' Association, echoed that opinion in a memo to industry leaders who were gathered for a meeting in September 1995. "There are enormous opportunities to finance new environmental developments and the development of alternative energies," the memo said.

Leggett points out that much of the $1.4 trillion in premiums collected annually by the insurance industry is invested in fossil fuels, and hardly any in solar and other renewable energy sources. While he would like to see that situation reversed, he acknowledges how difficult it has been to shift those resources.

"Even though people would like to place investments today in the solar market, there is a very imposing set of barriers preventing them from doing that," Leggett explains. "To all extents and purposes, when you're an institutional investor, these [solar] markets don't exist as things stand. For example, an institutional investor has two constraints: one is on scale and the other on profitability. They have to make big investments for a variety of reasons. An investment of ten million dollars is not worth their while; we're talking about multi-hundred-million-dollar investments. And they have to have a certain minimum profitability.

"If really senior people from insurance companies and banks get together with policy makers at all levels and start talking about their concerns and their desire to see these markets built and investment vehicles created, then that's going to light a fire under policy makers."

The possibilities as well as the obstacles facing renewable energy industries are also apparent to Christopher Flavin, vice president for research at the non-profit Worldwatch Institute in Washington, D.C. "Despite the prospect that investments in new energy technologies could strengthen many economies, some industries — particularly in the United States — seem to be in a state of denial. The Global Climate Coalition (which represents not just the coal and oil industries, but automakers, electric utilities, and the National Association of Manufacturers)" seems to aim most of its efforts "at obstructing and delaying the implementation of the [Berlin] treaty," says Flavin in Worldwatch's 1996 State of the World Report.

But Flavin also points out encouraging similarities between global climate change and ozone issues. In the late 1980s, industry and governments were adamantly opposed to serious restrictions on ozone-depleting chemicals until the chemical industry realized how lucrative substitutes for those products could be. Flavin says the world's leading chemical companies reversed themselves on the issue in a matter of weeks.

Although few people would bet on such a rapid turnaround in this case, Leggett believes the international economy will start shifting noticeably toward renewable energy, especially solar, in the next three years. That evolution, according to Leggett, can be gauged by watching the development of projects already underway, such as the recent Amoco/Enron Solar joint venture to build multi-megawatt PV power stations. If the joint venture succeeds and attracts investments from the financial sector, it "could have a very galvanizing effect," he says.

Despite the current lack of large institutional investors, several multinational companies including Sumitomo, Canon, Bechtel, Siemens —have made significant investment in solar during the last couple of years based on the expectation of profits and sustainability. And Sklar still sees many opportunities to attract investors in today's markets. "The U.S. can still create at least 200,000 net jobs while conforming to the Rio accords—that's the ultimate 'no regrets' plan."

Among the groups working to draw greater attention to the short- and long-term benefits of shifting toward clean energy is the Business Council for Sustainable Energy, comprising the National Gas Association, SEIA, the Alliance to Save Energy and Worldwatch. Formed in 1992 as a precursor to the Earth Summit in Rio, the council is building alliances among environmentalists and the solar, renewables, natural gas and energy efficiency industries in order to support appropriate global policy initiatives.

"The sustainable energy future will involve, of course, a complete mix of renewable energy technologies and maximal energy efficiencies," Leggett says. But the backbone of it will be huge multi-billion dollar markets in solar PV and solar thermal."

The course of the market, like weather itself, is never entirely predictable. But if the forecast is correct, the solar industry may soon see some very bright days.

Back to Top